'Have realistic expectations from Budget 2019; fiscal spending to increase'

Budget announcements pertaining to real estate and infra sectors would be appreciated. However, rather than focussing on one event, we expect reform process to continue beyond the Budget, Ashutosh Bhargava, Fund Manager and Head Equity Research, Reliance Nippon Life AMC said in an interview to Moneycontrol's Sunil Shankar Matkar.

Edited excerpts:

Q: After a third rate cut by RBI in 2019, do you expect further rate cuts?

A: Despite three rate cuts in 2019, the real interest rates remain high in India. RBI has consistently lowered its growth and inflation forecasts as underlying demand remains subpar. Even assuming RBI's FY20 inflation forecast of 4 percent, there is scope for 25-50 bps rate cut over the coming months.

The factors that are supportive for easy monetary policy include lower and falling global interest rates, moderation in oil prices, sustained decline in core inflation, prospects of normal monsoon and stable INR. If these factors sustain for a longer period, the room for further decline in policy rate will open up.

Q: Many economists are saying the economy will gain momentum in the second half of FY20. What do you think?

A: After peaking at 8 percent in Q1FY19, GDP growth rate has moderated over 2 percent by the Q4FY19. There are various factors responsible including a lagged effect of financial tightening due to NBFC stress, lower government spending, weak exports and election-related uncertainty that impacted capex growth in recent months. Some of these would dissipate as we move into the second half of FY20.

We expect a certain and gradual growth recovery in the second half of FY20 on benign monetary policy, normal monsoon and government stimulus. Hopefully, the stress in the unorganised sector reduces too over the next couple of quarters. For sustained growth recovery beyond FY20, it is essential that monetary and fiscal policy remain expansionary in a foreseeable future.

Q: Indices have rallied sharply in the last few weeks even though earnings have slowed down. What is the risk factor for the equity market now? 

A: After a strong election verdict, the market has seen a sharp broad-based rally as the big overhang is behind. There is an anticipation of strong policy support to jumpstart growth. As long as the government and the RBI continue to provide the required stimulus, the market will look past any near term earnings disappointments.

The bigger risks, however, are emanating from global markets, where the markets are under pressure owing to renewed concerns on US-China trade dispute along with more than anticipated weakness in global growth. In the last two months, India has materially outperformed global peers but any extension of global risk-off environment would post a challenge for our market.

Q: After the RBI monetary policy, the key event to watch out for is Union Budget. What are your expectations? 

A: One should have realistic expectations from the budget as the government has limited fiscal space. We expect fiscal spending to increase on account of the farmer income support scheme. We expect the government will keep relaxed fiscal targets as the economy needs support and private sector recovery may take some time.

Announcements pertaining to real estate and infra sectors would be appreciated. However, rather than focussing on one event, we expect the reform process to continue beyond the budget.

Q: What is your take on the auto sector?

A: Auto sector is facing a severe cyclical slowdown owing to overall weaker domestic demand, slowdown in NBFC lending and weaker global demand. Given the sharp correction in sales, it is possible the worst could be behind.

Given the limited penetration levels, the longer term outlook for the sector remains positive. However, the shape and magnitude of the near term revival seems a bit uncertain and will be dependent on any potential policy support including tax cuts, speed of monetary transmission and stability in global demand.

Q: Where do you see midcaps heading?

A: After a significant time and price correction, the broader market is providing attractive opportunities across sectors. In contrast to largecaps, midcaps have a higher orientation towards the domestic economy. The medium-term outlook for the Indian economy is much better than the global economy and thus midcaps may perform better.

Moreover, there is reasonable consolidation that has happened in various industries and once the economic recovery starts there could be a meaningful pickup in operating profitability across companies particularly in midcaps. That said, investors need to have a longer-term mindset to make meaningful double-digit returns across market capitalisations.

Q: What is the strategy behind Balanced Advantage Fund and why retail investors should consider investing in it?

A: The most important key to successful investing is asset allocation. Various studies have proven that an average investor earns less than the market returns due to emotional factors like greed and fear. To overcome these behavioural mistakes, balance advantage funds provide systematic asset allocation solution based on the underlying quantitative model.

The model prudently allocates between equity and debt considering factors like valuations. The disciplined approach minimises portfolio volatility and drawdowns and over the long period provides superior risk-adjusted returns. This is an all weather product which is particularly suitable for investors with lesser risk tolerance. New retail investors participating in the equities for the first time should strongly consider meaningful allocation in this category.

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